Fundamental Analysis: Zloty Extends Losses ahead of Rate Decision

The Polish zloty has continued to make losses today against most major currencies as trade-related risk continues to be high. However, support for PLN has come from higher chances of a rate hike and generally positive economic data recently.

USDPLN reversed losses at the end of last week to reach 3.84zł in the mid-morning GMT. The euro has also pushed significantly above the key area of 4.30zł. On the other hand, the pound has only recovered very slightly from last week’s lows to 4.954zł today.

Trade wars hit emerging currencies and PLN

The zloty, like many other minor European currencies, is sensitive to the outlook for growth around the world. Poland’s trade relationships are particularly dependent on economic prospects in the rest of the EU, primarily the eurozone and the UK. The latest news then of China imposing retaliatory tariffs on American goods was negative for PLN.

Recent escalations have seen both parties in the conflict impose new tariffs of 25% on the other’s products. The knock-on effect for Poland is likely to be higher prices of various imports as companies seek to recover costs plus lower demand in the rest of the EU for finished Polish goods.

On the other hand, PLN is an emerging currency only in the loosest sense of the term, not least because of Poland’s highly diverse economy. This could explain why this week’s news has provoked a strong reaction in USDPLN while the euro and the pound’s gains have been more modest.

This morning’s release from Germany’s ZEW was one of the first major signs of weaker confidence in the EU after the latest news of tariffs. The institute’s Indicator of Economic Sentiment at negative 2.1 missed expectations by more than seven points.

Domestic indicators remain strong

So much for external factors, but Poland’s economy in general is performing well. The preliminary figure for annual inflation at 2.2% is the highest in nearly two years. This suggests that the overall trend of increasing inflation in Poland since mid-2016 appears to be continuing.

In addition to inflation, average wages in Poland continue to increase rapidly. Average annual wage growth has been about 6.7% in 2019 so far, which is likely to contribute to higher consumer spending in the rest of Q2 and Q3 2019.

All eyes on the NBP tomorrow

The National Bank of Poland (NBP) concludes its two-day policy meeting tomorrow at noon GMT with its decision on the new reference rate. Analysts overall consider the likelihood of a hike to 1.75% to be at its highest for at least the year to date.

However, most see a hold as the most probable outcome. Compared with the last meeting of the NBP’s Monetary Policy Committee, a hike seems more favorable than before because of better inflation, growth in wages, industrial performance, and other economic factors.

Preliminary figures for GDP growth are due tomorrow morning at 08.00 GMT. These are unlikely to have much effect on trading due to the central importance of the afternoon’s announcement. However, traders should be prepared for volatility then, especially if the figures are particularly negative.

To some extent, data from the rest of the EU might affect the zloty towards the end of the week. The most important releases are inflation statistics on Friday morning at 09.00 GMT. Expectations are for annual core inflation to recover from last month’s weaker figures. If the consensus is missed here, one would expect the zloty to weaken in most pairs.

Watch the NBP for the zloty's next direction

The zloty’s fundamentals are generally fairly positive, but any more movements will depend on events tomorrow. A hike could drive strong gains for PLN, whereas downplaying such a possibility in 2019 would probably lead to sharp losses. Regardless of the outcome, traders of GBPPLN should monitor the critical psychological area of 5.00zł, around which volatility and sudden movements are likely to be higher.

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